To Get Out of the Doldrums, Energy Stocks Look for Catalyst

U.S. crude has held above $50 a barrel since mid-December and oil prices are up roughly 20 percent since Trump’s victory helped by OPEC output cuts. Near-record-high net long positions in U.S. crude futures and options are being held by hedge funds and other speculators, shows positioning data from U.S. Commodity Futures Trading Commission.

However the S&P energy index has not kept pace and this index is one of the key drivers to the stock market rally in the early days following the Nov. 8 election. For the year, it has slumped nearly 4 percent.

“We are seeing a little bit of a difference of opinion between equity investors and commodity investors,” said David Lefkowitz, senior equity strategist at UBS Wealth Management Americas in New York.

“Equity investors seem a little bit more worried about the outlook for the commodity and the actual commodity investors themselves don’t seem to be reflecting that.”

With the S&P 500 unable to register a move of more than 1 percent in either direction since Dec. 7, stocks could see more pronounced moves than have been seen in recent weeks should those opinions converge and energy stocks rebound.

With the 10-correlation at 0.61, its highest in three weeks, recently, the relationship between the energy sector and U.S. crude has also tightened.

A disappointment in quarterly results is believed to be partly responsible for the underperformance in the sector. Energy companies have under-delivered against the expectations that such companies would benefit from easy comparisons with last year. At that time last year, the price of oil sank below $30 a barrel.

Energy sector earnings for the fourth quarter are on pace for a fractional decline, shows Thomson Reuters data through Friday morning.

Moreover, measured by the number of companies in the sector posting better-than-expected results, the group has so far posted a beat rate of only 58 percent. This is well below the 68 percent rate for the S&P as a whole.

“Understand when you think about the energy patch in general, you have to separate out what the fully integrated guys were doing,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

“What drags the group down is when you lump in the majors, and they were spotty.”

Next week, when names such as Marathon Oil, Devon Energy and a host of smallcap companies in the group report results, that should put the focus on the next leg of earnings from energy companies.

According to estimates compiled by Thomson Reuters StarMine, while Marathon is expected to cut its loss by nearly 90 percent, Devon is forecast to post a modest profit after a massive loss a year earlier. With Devon up 8.3 percent and Marathon up 13.6 percent, shares of both have outperformed their peers since the election and both posted substantial upside earnings surprises in their previous reports for the third quarter.

“Definitely we are going to need to see some proof in earnings to play catch-up here,” said Jeff Zipper, managing director at the U.S. Bank Private Client Reserve in Palm Beach, Florida.

“Now we are going to see some clarity from when these companies report, at least in the sector, to see some follow through here.”